Fitch Ratings-Hong Kong-18 May 2016: Fitch Ratings has affirmed Vietnam’s Long-Term Foreign- and Local-Currency IDRs at ‚BB-‚ with a Stable Outlook. The issue ratings on Vietnam’s senior unsecured Foreign- and Local-Currency bonds are also affirmed at ‚BB-‚. The Country Ceiling is affirmed at ‚BB-‚ and the Short-Term Foreign-Currency IDR at ‚B‘.
KEY RATING DRIVERS
The affirmation of Vietnam’s IDRs with a Stable Outlook reflects the following key rating drivers:
The ratings reflect its strong macroeconomic performance and favourable medium-term growth prospects against high public debt, low foreign-reserve buffers, and relatively weak structural indicators.
Fitch estimates the 2015 budget deficit to have fallen to 5.8% of GDP, down from 6.2% in 2014, based on the agency’s adjusted measure that more closely aligns fiscal accounts with the Government Finance Statistics (GFS) standard. Fiscal revenues outperformed by approximately 2.0% of GDP in 2015 due to strong growth in domestic tax collection. We anticipate the majority of the 2015 revenue outperformance to be carried forward and spent in the current fiscal year, which suggests the 2016 adjusted fiscal deficit could rise to about 6.5% of GDP. Fitch expects the authorities efforts to reduce the budget deficit to below 4.0% of GDP over 2016-2020 will prove challenging in light of upcoming enhancements to fiscal reporting standards starting in 2017, which will bring more off-budget capital expenditure into the official State Budget.
General government gross debt (GGGD) continued to rise in 2015 to an estimated 51.1% of GDP, up from 47.3% in 2014, and higher than the ‚BB‘ median of 43.6%. Fitch forecasts GGGD to rise to 53.7% in 2016 and rise over the medium-term without a tightening of fiscal policy settings. A broader measure of public debt, including government guarantees, reached 62.2% of GDP at end-2015 and is near the National Assembly’s approved limit of 65%. The authorities reaffirmed commitments to the limit and articulated plans that include reducing the use of guarantees and cutting current expenditures in order to avoid a future limit breach.
Vietnam’s sovereign funding profile remains stable, but has increasingly pivoted toward domestic marketable debt in order to prepare for reduced access to concessionary financing resulting from the country’s forthcoming graduation from the World Bank’s International Development Association. Efforts to lengthen the average term to maturity of domestic debt have largely proved successful, with the average term of issuance increasing to seven years in 1Q16, from five years in 2014. Five-year domestic government bond yields were 6.3% in May 2016, up by 40bp since last year, but have broadly been on a declining trend over the past five years.
Real GDP grew by 5.6% in 1Q16, below the 2015 figure of 6.7%, but still higher than the ‚BB‘ median of 4.0%. The significant deceleration is largely attributable to a severe drought and saltwater intrusion across key agricultural production regions, which have contributed to a 2.6% year-on-year contraction in agricultural output. Mining and quarrying also reported a modest decline of 0.9% year-on-year, which is likely to be linked to the oil and gas industry downturn. Other sectors of the economy, including manufacturing and services, continued to report strong growth and are a key driver of our full-year GDP forecast of 6.2% in 2016.
Fitch forecasts Vietnam’s current account to post a surplus of about 1% of GDP in 2016, which reflects resilient export performance and depressed prices across nearly all primary commodity imports. The trade balance grew to USD1.5bn in April 2016 versus a deficit of USD3bn a year prior. FDI disbursements remain strong at 12% growth yoy, providing a foundation for continued growth in the country’s export oriented manufacturing sector over the medium term.
Foreign reserves were eroded significantly during 2H15 following efforts to stabilise the exchange rate amidst market pressures across Asian currencies and a pick-up in dollarisation. However, the agency believes the recent introduction of a more flexible exchange-rate mechanism, policies to discourage US dollar hoarding, and improved trade performance have alleviated balance-of-payment pressures and contributed to more than USD4bn in foreign-reserve replenishment during 1Q16. Fitch forecasts foreign-reserve coverage will rise to 2.2x current account payments by end-2016, still well below the ‚BB‘ median of 4.3x.
Fitch’s sector outlook for Vietnam banks was moved to stable (from negative) in December 2015 due to preliminary signs of stabilisation in asset quality and improving liquidity and funding conditions. Strong economic growth and a recovery in the property market will lead to slower NPL formation, but a rapid acceleration in credit growth poses a potential risk to medium-term financial stability. Fitch estimates credit growth accelerated to 17.3% in 2015, about 2.7x nominal GDP growth of 6.5%. The official credit growth target of 18%-20% for 2016 suggests that a broader re-leveraging of the economy will continue over the forecast period.
The authorities have continued to prioritize a structural reform agenda with a focus on market liberalisation, equitisation of state-owned enterprises, and enhancements to the broader business climate. Fitch believes Vietnam will be one of the largest beneficiaries of the Trans-Pacific Partnership (TPP), should it be successfully ratified by participating countries, through both enhanced medium-term growth prospects and by providing a key policy anchor for continued structural reforms and liberalisation.